In re Freeman

decided: February 11, 1946.

IN RE GSAND. FREEMANv.MCCARTHY.

Author: Mclaughlin

Before GOODRICH, McLAUGHLIN, and O'CONNELL, Circuit Judges.

McLAUGHLIN, Circuit Judge.

The only real question involved in this appeal is the extent of the authority of an attorney at law to bind his client under the particular facts. The client, McCarthy, loaned one Gsand the sum of $3500 within four months of the latter being adjudicated a bankrupt. The obligation was secured by an unrecorded assignment of one-tenth interest in a mortgage owned by Gsand. $2500 of the loan had been repaid to McCarthy prior to Gsand's bankruptcy. Thereafter a proof of claim was filed by Robert C. Kitchen, Esq., an attorney at law, on behalf of McCarthy in the bankrupt's estate. This showed the original debt, the payments on account and that the security for the debt was the assignment above referred to. Objections to it were filed by the trustee on November 20, 1943. These consisted of: (1) That the assignment was executed by the bankrupt within four months of bankruptcy; (2) that the assignment was invalid as it had not been recorded; (3) that the payments amounting to $2500 constituted a preference as they were made within four months of bankruptcy. It was asserted that "claimant is not entitled to have his claim allowed except upon the return of the foregoing preference." On December 21, 1943 ten trustee filed amended objections to the claim stating that claimant had received preferences from the bankrupt consisting of transfers of cash aggregating $2500 and the unrecorded assignment. The objections concluded by stating that the "proof of claim cannot be allowed unless claimant surrenders such preferences."

After the amended objections had been noticed for hearing, Mr. Kitchen wrote the Referee saying, "I have concluded that the objections of the Trustee are properly founded and for this reason agree to the entry of an order sustaining the same." On December 29, 1943 before the Referee and in the presence of counsel for the trustee, Mr. Kitchen said that the stipulation he was prepared to make for the record on behalf of his client was to the effect "that the concurrence with the petition of the trustee is limited to the status of the collateral upon which the claim of W. Robert McCarthy was filed as a secured creditor in that part which is eliminated, that failure in recording the assignment to Mr. McCarthy upon which his claim was founded would necessitate under the Act that the assignment be considered as security for an antecedent debt, although it was actually given contemporaneously with the debt which is secured for this reason. It is agreeable that objections to the filing of this claim as a secured claim be sustained by a form of order confined to that subject matter." The Referee asked Mr. Kitchen, "Do you agree that by the receipt of this cash money and the receipt of an assignment of a certain interest in a mortgage you received a preference?" Mr. Kitchen replied, "I agree that the assignment, which is the only thing claimed here by McCarthy under the terms of the Act would be considered preferential because the debt would be regarded as an antecedent debt." The Referee then queried, "What about the cash?" Mr. Kitchen answered: "I am not in Court on that." After the attorney for the trustee stated that Mr. Kitchen was under a misapprehension, there was a discussion between Mr. Kitchen, the trustee's attorney and the Referee which appears in the record as follows:

"By Mr. Kitchen: You say I am under a misapprehension, if so, I want to know. We filed no claim against the bankruptcy estate, we claim nothing against the bankruptcy estate only the collateral, we claimed that.

"By Mr. Wexler: You filed a claim in this case as a creditor.

"By Mr. Kitchen: The intention was simply to file a claim based on the collateral.

"By Mr. Wexler: You filed a proof of claim as a creditor to this case for a dividend. For example your client had in his possession $1,000. of bonds, would it necessitate the filing of a claim?

"By Mr. Kitchen: I think Mr. Wexler is correct, and I think the order should stand on that form.

"By Mr. Wexler: You agree to it?

"By the Referee: You have read it and agree to the entry of an order as presented by Counsel for the Trustee.

"By Mr. Kitchen: Yes.

"By the Referee: I will enter the order."

The Referee then made an order which holds that the partial payments amounting to $2500 constituted voidable preferences.*fn1 Thereafter the trustee demanded the reassignment of the mortgage collateral and repayment of the $2500. The former was agreed to. The latter was refused on the ground that the payments making up the $2500 were received by McCarthy without knowledge of the insolvency of the bankrupt.The trustee's attorney wrote Mr. Kitchen saying: "Since there is obviously disagreement between us on this issue, it would seem best to have the same legally determined, * * *." Suit was then commenced against McCarthy for the $2500. The basis of the action was the above referred to order of the Referee which was pleaded as a final adjudication of the merits of the matter. A motion to dismiss the trustee's complaint was denied by the Court for substantially the same reason. On May 5, 1944 a motion was filed to open the Referee's order. The motion alleged that the claimant McCarthy at the time he received the partial payments had no knowledge of the bankrupt's insolvency and gave no authority to his attorney of record to enter into any agreement, stipulation or admission of any nature in that particular. Relief was prayed for under Rule 60(b) of the Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723*fn2 The ...

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